Bank of Queensland profit stung by bad debts

By Eric Johnston

April 14, 2011 — 9.29am

Chief executive David Liddy to step down

Bad debts for the half surge 160%

Deposit growth outpaces the broad market

Shares rise in early trade, while ASX falls

Bank of Queensland has been able to hold its interim dividend steady even as the regional lender’s first-half cash profit slumped 41 per cent after being pummelled by a surge in lending losses related to Queensland’s floods and cyclones.

At the same time, Bank of Queensland continued to grapple with ongoing problems across its commercial property lending book.

Profit for the six months to February 28 of $57.6 million was down from $97.2 million the same time last year. Analysts had been tipping interim earnings of around $55 million after the bank had issued two profit warnings in recent months.

Liddy to step down

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Bank of Queensland also said its chief executive, David Liddy, will step down at the end of 2011 after 10 years at the helm and the bank has started a search for his replacement.

After more than a decade heading up the bank, Mr Liddy said he did not wish to extend his contract when it expires at the end of the year.

The career banker this morning said he was close to being ready to step down from full time executive leadership.

“Personally, I’m obviously disappointed to make this announcement at the same time as such a disappointing profit result, however I thought it was important to give the board enough notice to ensure a smooth and successful recruitment process for the benefit of our staff and shareholders,” he said.

BoQ managing director David Liddy said he was disappointed with the bad debt experience, and has put “significant resources” into tackling the problem.

Having disclosed in December that its commercial property loan exposures would reduce its anticipated increase in profits in 2011 by $20 million, BOQ followed that up in February with a warning that another $35 million had been cut from its earnings guidance given the string of natural disasters were driving loan losses higher.

Bad debts surge

The bank’s bad debt charge of $134.4 million for the half surged 161 per cent on the $51.4 million charge for the same period a year earlier.

However, Mr Liddy said the bank was now starting to see positive news on bad debts with “early signs of normal business activity and settlements restored to pre-flood levels within two months”.

“We have not changed our flood-related provisioning since the February update and, as the majority of our book is well secured housing and small to mid-sized business lending, we are comfortable there will be no further provisioning required in this regard”.

The bank had more than 900 customers impacted by both the floods and Cyclone Yasi.

While bad debts hurt the latest interim result, analysts argue the losses represent a “front loading” of the bank’s problems. Bad debts are tipped to fall sharply over the next year, although the bank still faces lower economic activity.

Deposits grow

Meanwhile, BoQ was able to outpace the broader market with deposit and lending during the half, despite the natural disasters. Deposits were up 13 per cent while its overall lending book was up 9 per cent during the half. Still, lending approvals which point to future asset growth fell 8 per cent during the half mostly on a broader drop in business lending.

One bright spot was in the increased net interest margin - a key driver of profit. This was up 10 basis points from the second half last year to 1.65 per cent.

Total revenue increased 14 per cent during the half to $390.7 million, helped by recent acquisitions. Still, this was largely offset by a 15 per cent increase in expense growth largely due to integration costs of acquisitions.BoQ held its half year dividend steady at 26 cents per share, marking the third half in a row where the dividend remained flat.

“Despite a challenging first half, the board decided to maintain a dividend in line with financial 2010, due to our strong capital levels and the non-recurring nature of this result,” Mr Liddy said.

With sluggish rates of shareholder returns since in onset of the credit crunch, Mr Liddy has been attempting to boost return on equity partly by diversifying its business which has seen the group expand into consumer credit insurance and vendor finance.

Returns from two recent acquisitions including the St Andrews life insurance business were running ahead of forecasts, Mr Liddy said.

The regional lender is aiming to generate more than a third of earnings from the new businesses within the next few years.

The interim profit kicks off the remainder of the bank reporting season, with bigger rivals ANZ, National Australia Bank and Westpac to start handing down their half year results from the end of this month.